Chainsaw Al

He anointed himself America's best CEO. But Al Dunlap drove Sunbeam into the ground

October 18, 1999, 12:00 AM EDT

Early on the morning of June 13, 1998, the outside directors of Sunbeam Corp. made their way through the empty streets of Manhattan to Rockefeller Center. It was a Saturday, and angry thunderstorms drenched the sidewalks, as if the gods of Wall Street were outraged that the directors would dare meet secretly, behind the broad back of the company's celebrated chief executive, Albert J. Dunlap. After all, he was the no-nonsense executive famous for turning around struggling companies--and sending their shares soaring in the process.

On this dreary day, the four board members assembled at 8 a.m. in the tenth-floor law offices of Howard Kristol, Dunlap's longtime personal attorney and a Sunbeam director. Another was patched in by phone from Captiva Island, Fla. Of the five board members, four had been chosen by Dunlap himself. They took their seats in the same conference room they had occupied only four days earlier when Dunlap had stunned them by suggesting that he and Chief Financial Officer Russell A. Kersh were ready to quit if the directors refused to support them. Under questioning, Kersh had conceded that second-quarter sales were "a little soft."

"As you know," Director Peter Langerman began solemnly, "we've been talking for the last few days about our grave concerns over the company and the meeting with Al and Russ last Tuesday."

Langerman then asked David Fannin, an earnest, Kentucky-born lawyer who served as Sunbeam's general counsel, to brief the board. Fannin initially had welcomed the resolve Dunlap had brought to the troubled company 23 months earlier. But the stress of working for a man who styled himself "Rambo in Pinstripes" showed. Like many of his colleagues, Fannin had frequently borne the full force of the chief executive's angry tirades, which could reach the point of emotional abuse. Fannin and other Sunbeam managers believed that Dunlap's rages took him to within a hair's breadth of actual violence. As Fannin began to speak, there was a quiver in his voice and a persistent twitch in his face, a quirk that had become particularly bothersome in recent months as Fannin had quietly begun to oppose and even to despise Sunbeam's mercurial CEO.

"The day-to-day atmosphere at the company has really deteriorated," he told the board. "Al is no longer in touch with the business and what's going on at the company....Al isn't talking to people. He has cut himself off."

A WAY OUT? Worse, the directors believed that Dunlap was hiding the true condition of the company. Fannin told the directors of a meeting on June 4 in which one of Sunbeam's top operating executives warned Dunlap and Kersh in a written memo that the company was facing an $80.9 million gap in second-quarter revenue. When asked by a director about the condition of the company just five days later, Kersh merely said that sales were soft. A shortfall of that size, however, would wipe out the 5 cents to 10 cents per share profit that Dunlap had promised the board and Wall Street only weeks earlier and could well force the appliance company into the red for the second quarter in a row.

"The numbers aren't soft," said Fannin. "They are horrible."

(In his statement,* Dunlap said he did not learn of the shortfall in sales until June 13, the day he was fired. Kersh said in his statement that any suggestion that either he or Dunlap withheld information on the company's deteriorating sales position was without merit and that he, too, did not learn of the company's lagging sales until after he was dismissed.)

Fannin's news outraged Dunlap's boardroom friends, who suspected that Dunlap and Kersh knew the company was in trouble and simply wanted to skip and run.

"They were looking for a way out," Langerman told his fellow directors. "They were giving us the bait the other day, hoping that we would take it. That would have let them off. Al could say, `I did my best. I succeeded, and this board decided it didn't want me."'

AGHAST. By 10 a.m., Dunlap's handpicked board concluded that the CEO had to go. But there was a problem. Dunlap was scheduled to leave his home in Boca Raton by 3 p.m. to catch a flight to London to promote the paperback edition of his book, Mean Business. It didn't leave much time.

Kristol suggested waiting until Thursday when Dunlap would return. Having a few extra days would give the board time to prepare legally for the firing, to consider who would succeed Dunlap, and to communicate the news inside and outside the company.

Fannin was aghast, terrified that word of his meeting with the board would leak out and Dunlap would retaliate.

"I cannot work for that man another day," he said, his voice wobbly with emotion. "I can't do it."

"Don't go into the office," advised one director. "Just call in sick."

"He'll call me. He'll know that this meeting took place," said Fannin. "I just can't do it."

The general counsel broke down and abruptly left the room. After a sleepless night and nearly two years of work under Dunlap, he was utterly depleted.

Ultimately, the five directors agreed and arranged a carefully scripted conference call with Dunlap and Kersh for midafternoon. At about 2:20, Langerman began slowly reading from a prepared text.

"Al," he said, "the outside directors...have decided that your departure from the company is necessary." On he droned, careful not to stray from the script, as he drew to a close the turbulent reign of Al Dunlap at Sunbeam. "The resolutions have been duly adopted," concluded Langerman. "Al, whom would you like our lawyers to call to discuss your contract?"

Dunlap was fired. The mood in the room was quiet and sober as the board began methodically contacting Sunbeam's operating executives to report Dunlap's dismissal. With each phone call, however, the anxiety level rose. For one thing, the estimate of the second-quarter shortfall grew from $80.9 million to $200 million.

But the biggest jolt occurred when Langerman reached Treasurer Ronald R. Richter, who had joined the company four months earlier. The shortfall, thought Richter, could pose problems with creditors. He began to mention the word covenants, the requirements that lenders impose to protect their loans.

"We might not make the covenants," Richter said.

"I can't believe this," said Langerman. "We could default." A hush fell over the boardroom. Everyone in the room now realized they weren't simply dealing with another down quarter. It was possible, Richter conceded, that within two weeks the company's banks could call in a recently extended $1.7 billion loan, forcing the company into bankruptcy.

When Langerman later reached Sunbeam Controller Robert Gluck in Florida, yet another alarm sounded.

"What are we using for cash these days?" asked Finn Fogg, Sunbeam's outside counsel from Skadden Arps.

"What?" asked Gluck.

"What are we using for cash?"

"Well, there's the revolver," replied the controller.

Langerman, standing by the credenza for the speaker-phone call, slumped into a chair in horror.

It was a profound revelation. Dunlap, the man who proclaimed himself the best chief executive in America, had driven the appliance maker into the ground.

BULLETPROOF VEST. Not even Dunlap's harshest critics could have predicted such a disastrous outcome when the chief executive first strode into Sunbeam. The day after Sunbeam announced that it had snared the self-styled turnaround artist and downsizing champion as its CEO, the company's shares soared nearly 60%, to $18.63, as one analyst after another urged investors to load up on the stock. After all, at Scott Paper Co., Dunlap's last CEO assignment, he had driven up shares by 225% in 18 months, increasing the company's market value by $6.3 billion.

Sunbeam investors knew that Dunlap's arrival meant that tough medicine would soon be administered. And at precisely 9 a.m. on Monday, July 22, 1996, when Dunlap marched into the penthouse boardroom at Sunbeam headquarters in Fort Lauderdale, the anxious group of executives gathered around the table knew it, too. Dunlap wasted no time on introductions. Like George C. Scott in the movie Patton, he began by delivering a spellbinding, if sometimes disjointed, monologue on himself and the company.

"You guys are responsible for the demise of Sunbeam!" Dunlap roared, tossing his glasses onto the table. "I'm here to tell you that things have changed. The old Sunbeam is over today. It's over!"

Dunlap, the men later observed, looked exactly as he did in the photographs that accompanied the fawning magazine stories many had read over the weekend. He wore his pinstripes like a military uniform, meticulously pressed, without a single wrinkle or stray thread, and perfectly fitted to his stocky frame. A white handkerchief peeked out of the breast pocket of his dark blue suit. On his left hand, he sported a chunky West Point class ring above his wedding band.

"The old Sunbeam is over," Dunlap thundered again and again. His chest was puffed out and his face flushed. The men stared in silence at this performance. Some said later that they almost expected Dunlap, like Patton, to slap someone out of frustration.

"This is the best day of your life if you're good at what you do and willing to accept change," Dunlap continued. "And it's the worst day of your life if you're not."

Once his monologue was through, Dunlap tossed off questions and comments like so many hand grenades. After noting that Sunbeam had missed five consecutive quarters of profit and revenue estimates, he turned to Paul O'Hara, the company's chief financial officer, who would soon be replaced by Kersh. "And you delivered these numbers," Dunlap shouted. "How could you in good conscience have done that? How could you have supported these forecasts?" O'Hara did not dare to attempt a response.

The men gathered around the conference table were stunned by Dunlap's attack. "It was like a dog barking at you for hours," recalled Richard L. Boynton, president of the household-products division. "He just yelled, ranted, and raved. He was condescending, belligerent, and disrespectful."

As if that first meeting weren't enough, there were soon other signs that Sunbeam had entered a new era. Human resources chief James Wilson recalls being thunderstruck when he got Dunlap's first expense report and saw that his boss had charged off a bulletproof vest. "I knew it was a different world," Wilson says. Later, Wilson added, Dunlap would expense a handgun for himself. Almost everywhere he went, Dunlap was shadowed by a company-paid bodyguard.

NEAR CHAOS. Just as he had promised, Dunlap lost no time burying the old Sunbeam. Three days into the job, he held a telephone conference with several hundred analysts, investors, and business reporters. Eager to show how quickly he could move, Dunlap spoke as if he had all the company's problems diagnosed. He told the analysts that if he were a Sunbeam shareholder, he would have "hung" former management. He pledged a "massive and swift restructuring" to turn the company around in less than a year. "We've got too many people, too many products, too many facilities, and too many headquarters," Dunlap proclaimed.

That battle cry was one Dunlap had repeated many times. In each of the companies he had "rescued"--American Can, Lily Tulip, Crown Zellerbach, Scott--Dunlap had started by decrying the waste and inefficiency of previous management. Then he had brought in C. Donald Burnett, a senior partner at Coopers & Lybrand, to work out the details of the vast payroll cuts and plant closings that were Dunlap's signature.

Sunbeam was no exception. Within a week, Burnett and his troops were crawling all over the company. Eventually, a dozen consultants worked at company headquarters. Another dozen worked in the field, visiting Sunbeam's factories, warehouses, and sales offices, interviewing managers and compiling facts.

Still, many managers believed that the consultants' job was not to figure out how much to cut but simply to find enough bodies to meet Dunlap's preset goals. Once, when the Coopers team came back with estimates of layoffs that didn't meet Dunlap's expectations, Sunbeam managers heard the CEO quip that Burnett was "getting weak-kneed in his old age." (A statement from Coopers and Burnett said "what dictated the size of the layoffs was Mr. Dunlap's desire to downsize only once and to then get on with running the company.")

Burnett's restructuring plan, approved by the board on Nov. 12, 1996, turned Sunbeam upside down and inside out. It called for the elimination of half of the company's 6,000 employees and 87% of its products. According to Sunbeam managers, it also resulted in near-total chaos.

In almost every case, numerous executives said, the restructuring plan cut not merely fat but muscle, leaving shortages of skilled and experienced talent throughout the corporation. In human resources, for example, the Coopers plan cut the staff from 75 to 17. In meetings with Jack Bonini, one of the lead consultants under Burnett, HR chief Wilson was assured that he'd be left with a staff of 28 or 30. The first time Coopers informed him of the lower number was during its presentation to Dunlap.

"Jim," Bonini replied calmly, "it's all ratio. Most people have maybe one [HR manager] per hundred employees. We're going to give you one for every 300. That's the way the ratio works."

(In a statement, Bonini said, "I don't recall any such conversation or the alleged circumstances of it." Coopers and Burnett said the restructuring plan was developed after consultation with managers. "Department managers agreed with the requirements developed for required staffing levels and skill sets," their letter said.)

With managers and employees being fired every day, Sunbeam execs said that most departments and functions lacked the people to get a normal day's work done. Plants that were needed to produce goods already promised to retailers were being shut down. Computers no longer worked. Some surviving factories lacked the parts inventory to make their products. "There weren't enough people to execute stuff," said Paula Etchison, a Sunbeam veteran who headed up new business development. "The budgets kept getting reduced. Everything was starved of resources. It was a disaster."

In some cases, Sunbeam execs said, the drive to downsize led to additional costs. For example, the consultants assumed that Sunbeam could operate with a flexible workforce that would allow it to cut production of seasonal products such as electric blankets and grills during the off-season and ramp up production when the products were needed. But Coopers, according to Sunbeam executives, failed to account for the fact that employees needed year-round jobs and if you laid them off, you probably wouldn't be able to hire them back. (Coopers and Burnett said the cutbacks made sense. "Several Sunbeam manufacturing plants had been utilizing flexible workforces for some time," their letter said. "We recommended that policy be continued.")

DEAD COMPUTERS. Coopers also urged Sunbeam to fire its computer staff and outsource the entire information processing function. Dunlap axed technicians making $35,000 a year who quickly discovered they were worth $125,000 a year elsewhere. To replace them, according to Donald Uzzi, executive vice-president for worldwide consumer products, Dunlap had to hire contract workers at far higher rates, some of whom were people he had just let go. (Coopers and Burnett said the consultants recommended outsourcing of selected functions. "In a previous company restructuring, Sunbeam's management had successfully outsourced the IT function. They therefore decided that this approach also would be effective at Sunbeam.")

In the midst of all this, the company attempted to upgrade its computer systems, with no backup. The result: The computers were down for months. Sunbeam was forced to manually invoice customers such as Wal-Mart and Sears Roebuck.

"We couldn't bill our customers," said Uzzi. "We couldn't keep track of our shipments. We didn't know what we were shipping. We had customers calling day and night, asking where their orders were. Some had three orders instead of one. Others had the wrong order. Our customers were irate."

By early 1997, the stress pushed Sunbeam's managers almost to the breaking point. Working on the front lines of a company run by Chainsaw Al, as he was known, was like trench warfare. The pressure was brutal, the hours exhausting, and the casualties high. Dunlap had imposed such unrealistic goals on the company that most Sunbeam managers believed he was engaged in a short-term exercise to pretty up the business for a quick sale. Indeed, Fannin and other senior executives said they frequently heard Dunlap berating Morgan Stanley Dean Witter investment banker William Strong, who had been working with Dunlap since April, 1997, for not finding a buyer. "Goddamn it, look what you've got here," Dunlap said. "You've got a turned-around company. Anybody could sell this."

But selling Sunbeam would not be so easy. For one thing, Dunlap's celebrity had helped push the stock to premium levels, making it too rich for most acquirers. For another, it was becoming increasingly difficult to meet Dunlap's projections. To double revenues to $2 billion by 1999, Sunbeam would have to increase sales five times faster than rivals. To boost operating margins to 20% in just over a year, Sunbeam would have to improve its profitability more than twelvefold from the measly 2.5% margins it had. To generate $600 million in sales through new products by 1999, the company would have to smash home runs with every at-bat.

Almost all his executives believed these goals were impractical. Dunlap, however, refused to acknowledge the near-impossibility of meeting them. Instead, he began putting excruciating pressure on those who reported to him, who in turn passed that intimidation down the line. People were told that either they meet their goals or another person would be found to do it for them. Their livelihood hung on making numbers that were not makeable.

In Dunlap's presence, knees trembled and stomachs churned. Underlings feared the torrential harangue that Dunlap could unleash at any moment. At his worst, he became viciously profane, even violent. Executives said he would throw papers or furniture, bang his hands on his desk, and shout so ferociously that a manager's hair would be blown back by the stream of air that rushed from Dunlap's mouth. "Hair spray day" became a code phrase among execs, signifying a potential tantrum.

Many of his executives believed that Dunlap didn't care about the details of the business. "In a meeting with Al, you are not there to tell him anything," said William Kirkpatrick, an operating manager who worked with Dunlap at both Scott and Sunbeam. "You are there to listen. If you didn't hit your numbers, he would tear all over you."

Sunbeam managers had more than just their jobs at stake. Dunlap had handed out huge stock option grants soon after arriving. The top 250 to 300 executives and managers at Sunbeam received option grants that were typically twice the size of what they might get at other companies. All were aware of what such grants had meant for managers at Scott, many of whom walked away with millions. But the Sunbeam options vested over a three-year period. For many, getting fired could mean losing out on more than $1 million in gains. Some Sunbeam managers believe that Dunlap's generosity had a perverse impact. The outsize rewards made it easier for employees to do things they might otherwise refuse to do.

"I have thousands of resumes from people who would work here for free," Dunlap would scream, inches from his victim. "You are being paid to work here, and you can become rich because I've given you all these options. And you're letting me down. I'm working hard for you on the Street, and you're letting me down."

UNPAID BILLS. To make the quarterly numbers required a fierce dash to every finish line, yet for a long time, Dunlap's executives and managers did it. The company outdid the Street's projections for the first quarter of 1997, earning 24 cents per share, 2 cents better than expected. Its second-quarter profit of 30 cents per share was right on the Street's estimates, and in the third quarter, with earnings of 34 cents a share, Sunbeam beat the analysts' consensus by a penny. In October, 1997, the stock hit a record $50 a share.

Inside Sunbeam, however, there was little enthusiasm. The survival tactics of kissing up and kicking down sowed bitterness and frustration. By the fourth quarter, as it became more difficult to meet the numbers, a new and rather menacing management technique was invented. It was called "tasking." Kersh and Dunlap would gather the top executives in the boardroom and ask each to run through the numbers for their businesses. If one area was lagging, someone else would be asked to make up the difference so Dunlap's forecasts to Wall Street could be met.

"They would say, `I don't care what your plan was. I don't care what you delivered last month,"' recalls Dixon Thayer, head of international sales. "`We are going to task you to this number.' Russ [Kersh] would give you a revenue and profit number and say, `We don't want any bullshit. Your life depends on hitting that number.' These numbers got to be so outrageous they were ridiculous."

In an effort to hang on to their jobs and their options, some Sunbeam managers began all sorts of game playing. Commissions were withheld from independent sales reps. Bills went unpaid. Some vendors were forced to accept partial payment. One director reported getting a call from a headhunter begging for help in collecting a bill from Sunbeam. "It was personally humiliating," recalled Susan Robertson, a manager in new-product development. "I couldn't tell for sure if they were simply pinching pennies or [if it was] because we were short on cash. Later on it became apparent it was the latter."

Other dubious techniques were used to boost sales. Product was heavily discounted to get retailers to buy more than needed. Credit terms were extended. By May of 1998, an internal memo shows, all of the company's major customers were loaded to the gills with Sunbeam merchandise. Wal-Mart Stores, for example, which prefers four weeks of inventory, was loaded with 23.6 weeks of Sunbeam appliances. "We were jamming inventory at people like you couldn't believe," said a top salesman. "Most of the stuff I had done before for solid companies. We just took it to another level. We did it every quarter, with every customer, on every product."

The games did not go completely unnoticed, even on Wall Street. By mid-1997, William H. Steele of Buckingham Research Group in San Francisco saw signs of trouble. Inventory in the second quarter hit $208 million, up $60 million from first-quarter levels. Meanwhile, cash on hand fell by $36 million. Steele downgraded the stock to neutral in July.

Most analysts, however, were still in the midst of an extended honeymoon with Dunlap, who cultivated the relationship. Despite the chaos inside the company, Sunbeam's chief kept up a steady drumbeat of optimistic sales and earnings forecasts, promises of tantalizing new products, and assurances that the Dunlap magic was working. Even Andrew Shore, an analyst at PaineWebber Inc. and one of the few who hadn't entirely bought into the Dunlap mystique, upgraded the stock to a buy in October, 1997. He noticed the same disturbing trends as Steele, but wrote: "Sunbeam possesses an intangible asset, the Dunlap factor."

"THE DITTY BAG." As Sunbeam moved toward the holiday season, its struggle to make its numbers became more desperate. Of all the ploys, few were as controversial and daring as the "bill-and-hold" sales of barbecue grills the company began making in early November. Anxious to extend the selling season for the product and boost sales in Dunlap's "turnaround year," the company offered retailers major discounts to buy grills nearly six months before they were needed. The retailers did not have to pay for the grills or accept delivery of them for six months. The downside was evident: The company was booking what would have been future sales in the present. Indeed, after Dunlap's departure from the company, outside auditors would force a restatement of Sunbeam's financials, pushing most of these sales--$62 million worth--into future quarters. (Outside auditor Arthur Andersen & Co. declined to comment, citing pending litigation. Dunlap said bill-and-hold sales were proper under accepted accounting principles. "There is absolutely nothing improper about this practice," he said.)

In the fourth quarter, however, no amount of game playing or beating up on people could produce the numbers Dunlap had promised investors. So he turned to his longtime ally and CFO, Russell Kersh, who had been with him through his stints at Lily Tulip and Scott Paper.

In the often esoteric interpretations that are made in accounting, Kersh was rarely conservative or bashful about his creative competence during his tenure as Sunbeam's CFO. In a self-congratulatory tone, he would point to his chest and boast to fellow executives that he was "the biggest profit center" the company had. Dunlap knew it as well. At meetings, executives recalled, Dunlap would say: "If it weren't for Russ and the accounting team, we'd be nowhere." Several executives heard Dunlap shout to subordinates: "Make the goddamn number. And Russ, you cover it with your ditty bag."

The phrase itself was a nautical term. A ditty bag was used by sailors to hold small articles.

At Sunbeam, it was the collection of accounting techniques that Kersh could employ to maximize the company's net income and sales. Throughout 1997, Kersh had been regularly dipping into the bag to help create a "turnaround" for his boss.

One technique was simply to tap into the excess funds that had been placed in reserves when Dunlap took his $300 million restructuring charge in 1996. Like many CFOs, Kersh took a bigger write-off than he would need, allowing him to later bleed the excess into income. Until the fourth quarter, however, his reversals were fairly minimal. He took into income only $500,000 in the first quarter, $4.5 million in the second, and $1.5 million in the third, financial records later revealed. In the year's final quarter, however, when profits were off significantly, Kersh opened up the tap and poured $21.5 million from reserves into income. (Kersh said: "Al's instructions to me at all time were to act always in ways that were morally and legally responsible and that met our fiduciary duty to shareholders, and I did.")

Despite the boost from Kersh, Sunbeam's fourth-quarter financials still disappointed Wall Street. When Dunlap finally reported the numbers on Jan. 28, he turned in earnings of 47 cents per share, which was a cent short of analysts' expectations. The shortfall caused Sunbeam stock to fall nearly 10%, to $37.625. Dunlap attributed the stumble to lower sales of electric blankets.

What investors didn't know would have caused Sunbeam's stock to suffer a total collapse. Shifting the $21.5 million from reserves into income--a transaction that only came to light when Sunbeam restated its financial results a year later--enabled Kersh to disguise the company's calamitous erosion in profit margins. It helped to cover up the deep discounts given to customers by Sunbeam to stuff and load the retail channels. Auditors later concluded that grill sales made under massive discounts, extended credit terms, and "bill-and-hold" transactions inflated fourth-quarter sales by $50 million. Instead of reporting revenues that were up 26%, to $338.1 million, Sunbeam sales would have increased by only 7%. (Dunlap said: "I had no reason to doubt the accuracy of any financial statement Sunbeam made while I was CEO, and I have no reason to do so now." Kersh said he relied on managers to be factual and candid and not to withhold negative information. "Similarly, we shared negative information with the board, and disclosed it publicly, as it was known," he said.)

As the company's performance deteriorated, the pressure inside Sunbeam was building. There were signs that it was even getting to Dunlap. In February of 1998, the Boca Raton police department received a phone call from a golfer who alleged that he had been assaulted at the Boca Raton Resort & Club, where Dunlap lives. According to the police report, Frank Schienberg, who winters in Florida, had hit his ball just into a small lake near the 14th hole. As he and his wife strolled toward the lake, Schienberg saw Dunlap fish his ball out of the water with a metal golf ball retriever. When Schienberg asked for the ball back, Dunlap heaved it into the lake.

Schienberg told police that when he complained, an angry Dunlap rushed at him wielding the retriever and pressed the metal bar against Schienberg's throat, forcing him to his knees. When questioned by police, Dunlap denied that he assaulted the man but conceded he refused to hand Schienberg the ball back and said he dropped it where he found it. Schienberg, who later received a settlement from the club, could not be reached for comment. Dunlap received a much smaller settlement, charging the club had maligned him.

DISILLUSIONED AUDITOR. Back at headquarters, others were also reacting to the pressure. In March, a young, low-level employee in the company's internal audit department decided she'd had enough. Deidra DenDanto, 26, had joined the company in late 1996 after a two-year stint with Arthur Andersen. With Internal Audit Director Thomas Hartshorne, whom Kersh had originally recruited to Scott Paper, she was part of a two-person internal audit group.

Almost from the start, DenDanto had challenged deficiencies she perceived in operations. By early 1998, she had come to believe that most of her work at Sunbeam was futile. There was little follow-up to her recommendations. She believed that company officials provided few satisfactory answers to the questions she raised about the company's aggressive sales tactics. When Sunbeam resorted to hawking appliances in parking lots and empty storefronts to boost revenue, she unsuccessfully challenged the transactions on the basis of inadequate controls. Product returns, the focus of one of her earliest audit reports, had become an even larger problem. For example, fully one-third of the merchandise sold in Canada in 1997 had been returned. "There was no consequence to it," she said.

Disillusioned, she put her frustrations on the record. In a memo dated Mar. 12, 1998, DenDanto raised questions about the function of the internal audit department, the bill-and-hold transactions, and the accounting measures for them. She also expressed dissatisfaction over her department's inability

to correct perceived misdeeds or mistakes.

"It is with much disappointment that internal audit must again bring to management's attention the lack of prudent, ethical behavior being engaged in by this organization in order to `make numbers' for the company...," DenDanto wrote. She added that the bill-and-hold sales were "clearly in violation of GAAP" (generally accepted accounting principles).

DenDanto intended to address the memo to Dunlap, Kersh, and Uzzi and to copy it to Hartshorne and the board of directors. Before sending it, however, she wanted her boss to see it. Though angry, she felt a sense of loyalty to Hartshorne, who she thought was "stonewalled" as often as she. On Mar. 12, she called her boss aside and handed him the two-page memo.

"I'm done," she said. "I'm so sick and tired of doing my job and having it mean nothing."

Hartshorne, she recalled, glanced at the document and quickly ushered her into an empty office.

"You can't send this to the board," he said.

"Tom, you're my boss," she replied. "It's my responsibility to pass this to you. You do with it what you want."

(In a written statement, Hartshorne denied that he advised DenDanto against sending the memo. "I asked her if she had analyzed all of the relevant facts and she admitted that she had not.... I told her she had better make sure of all the facts before she sent out any memos," he said.) Hartshorne picked up the phone and called Kersh.

After Kersh hung up, DenDanto recalls, Hartshorne again advised her against sending the memo. "Let's see what happens," he said. "I'm sorry you're frustrated. But let's just wait."

DenDanto, not wanting to undermine her boss and reluctant to violate the chain of command, decided to keep the document in her laptop computer. But Kersh's words did little to comfort her. "We were a token internal audit department," she said later. "I believed the intention was that we do nothing."

(In his statement, Hartshorne said he did not believe the bill-and-hold sales violated GAAP and, further, that he had discussed the transactions with Sunbeam's audit committee and with the outside auditors.)

STOCK CRATERS. It wasn't until Apr. 3, after Dunlap had acquired a trio of companies, including camping equipment maker Coleman Co., and after he had already warned Wall Street of a slowdown in first-quarter sales, that Sunbeam began to publicly unravel. Early that morning, investor relations chief Rich Goudis had driven his Maxima into the parking lot at the Sunbeam building. Once inside, he left a succinct letter of resignation on Kersh's desk. It was a gracious letter, one that disguised his growing disgust for what was going on at Sunbeam.

Goudis was leaving the building when David Fannin pulled into the lot.

"Hi, Rich," he said. "What's going on?"

"Well," Goudis replied, "I'm leaving the company. I've always had great respect for you, but I can't work with Al and Russ anymore."

It was not a good omen. Fannin thought it was the worst possible time for the head of investor relations to quit. They were about to disclose news of another downturn in sales that would rock the stock market and draw hundreds of telephone calls from analysts, reporters, and investors.

He called Kersh at home.

"Rich Goudis has resigned," he said.

"Oh shit!" replied Kersh. "What's that all about? Why is he doing it?"

"He's taken another job. He left notes for everybody."

"All right," he said, "I'll be in in a few minutes."

Dunlap strolled into the office around 8:15 a.m., his normal starting time, with his normal starting words.

Once Kersh arrived, he and Fannin went into Dunlap's office with a draft press release announcing what would now be the third consecutive piece of disappointing news to Wall Street. Dunlap, however, refused to read the statement.

"No one should be looking at the current results," Dunlap insisted. "They should be looking at the [company's] potential.... If you're going to do this, get yourself a new boy. I'm out of here!"

Before they could release any statement, though, the stock market opened and Sunbeam shares began to crater. There was a torrent of telephone calls from investors and analysts wanting to know what was going on. Goudis' secretary kept running back and forth between the offices with messages. "What do I tell them about Rich?" she asked. "Who's going to talk to them?"

Kersh soon discovered that the stock's tumble was caused by Andrew Shore, the PaineWebber analyst. Always skeptical of Dunlap, he had become increasingly concerned by the deterioration of Sunbeam's balance sheet as well as the departure of several top executives. So he downgraded the company's shares.

In the face of the stock's free fall, Dunlap had become resigned to the fact that they would have to put out the press release. It said that Sunbeam expected to show a loss for the first quarter on sales that would be 5% below the year-earlier period.

On a conference call with analysts that afternoon, Dunlap had lost his usual ebullience. Reading from a prepared statement, he stumbled over the words and sounded stilted and wary as he insisted that the market had overreacted to Sunbeam's disclosure. By the time the market closed, Sunbeam, the most actively traded issue on the New York Stock Exchange, had lost almost a quarter of its value, ending the day at $34.375.

For Kersh, Sunbeam's keeper of the numbers, it had to be one of the most turbulent days of his career. It could not have eased his worries when DenDanto came into his office late in the afternoon to say goodbye. Disenchanted by the company's accounting practices, she had quit her internal auditing job.

SEC PROBE. The stock's collapse that day did much to tarnish Dunlap's image on the Street. Futile attempts over the next few months to restore the company to profitability would ultimately lead to his dramatic boardroom ouster in June. Kersh was dismissed soon after.

More than a year later, Sunbeam continues to struggle. In 1998, the company's losses totaled $898 million. Its new management team narrowed the net loss to $108 million in the first half of 1999 on $1.2 billion in revenues.

Sunbeam's stock, which hit a peak of $53 under Dunlap, has been mired in its own bear market, trading under $6 a share for most of the past 12 months. The company has been forced to renegotiate its loans four times since Dunlap's ouster. A number of shareholder lawsuits are pending, as well as a formal investigation of alleged by the Securities & Exchange Commission.

Many members of Dunlap's management team have gone on to other things. William Kirkpatrick was fired in January, 1998, allowing him to cash out his vested options near the stock's peak. In his first year off, he played 65 rounds of golf, rode his Harley motorcycle 2,000 miles, and read 200 books. He does some consulting but generally lives off the gains he collected from his Scott Paper and Sunbeam stock-option and severance packages. "When Sunbeam stock hit $50 a share, I genuflected and blessed Al every minute of the day," he says. "Al Dunlap has improved the wealth of my family."

Others have tried to put their experiences at Sunbeam behind them as they moved on to new jobs and challenges. Uzzi is now senior vice-president for global marketing at Electronic Data Systems Corp. Fannin is general counsel of Office Depot Inc., while human resources chief James Wilson found a similar job at Lennox Inc. Internal auditor DenDanto works as a consultant in New York.

Two who have been unable to move on are Dunlap and Kersh. In June, the pair won a court ruling that required Sunbeam to reimburse them for legal fees they incurred defending themselves against the ongoing lawsuits and to pay for a new study by Burnett's firm reexamining the restatement of Sunbeam's financials. They have also filed arbitration claims in which Dunlap is seeking $5.3 million in severance pay and the repricing of his stock options at $7 a share.

Though unemployed, Dunlap traveled to Australia in late May to participate in a series of leadership lectures with Norman Schwarzkopf and Mikhail Gorbachev. To great applause, as well as a reported $500,000 fee for five appearances, the executive delivered pithy one-liners, including his oft-repeated remark: "If you want a friend, buy a dog. I've got two." More recently, the caretakers of the golf course at the Boca Raton Resort and Club, reported seeing him wandering the links, retrieving stray golf balls.

This adaptation is from the forthcoming HarperBusiness book Chainsaw: The Notorious Career of Al Dunlap in the Era of Profit-at-Any-Price, written by BUSINESS WEEK Senior Writer John A. Byrne.

*EDITOR'S NOTE:

Chainsaw

is based on interviews with more than 250 insiders, including Sunbeam executives, managers, and directors, Wall Street analysts and investors, and others. It was through their cooperation that Byrne reconstructed scenes and dialogue. In doing so, the author interviewed as many participants as possible to make the scenes as accurate as memory might allow. In some cases, sources wrote out line-by-line accounts of conversations as they recalled them. Al Dunlap and Russell Kersh declined to be interviewed by Byrne but released statements to the press in July, 1998. Others submitted statements to

BUSINESS WEEK.

Parts of their comments have been included.

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